Innovation and globalization

1. Innovation and globalization Outline: • What is globalization? • World trade in historical perspective • Theories of trade and growth • International knowledge and technology flows: theory and evidence • International financial flows • International aspects of IPRs

2. What is globalisation? • “The increased interdependence of economies across the world” • Dimensions of globalization include trade, technology, finance and labour migration • Rise of Internet and falling costs of transport and communications make it easier/cheaper for firms of any size to gain access to foreign markets • Firms may export their products, source inputs from abroad, outsource part of their production • Financial flows lead to investment in any country • Most importantly, technology transfers across boundaries can be increased

3. World trade in historical perspective • International trade as a proportion of world GDP has risen very rapidly in last forty years • Trade/GDP ratio: 1970 13% -> 1990 20% -> 2005 28% (figures from Dean and Sebastia-Barriel, 2004) • These trends differ greatly from historical levels of trade/GDP: 1870 5% -> 1914 8% -> 1930 5% (figures from Maddison, 2001) • Large rise in trade between rich countries • Countries with high growth rates often experienced rapid growth in trade

4. Theories of trade and growth It can be difficult to know where to start here. Students may have done some aspects in other courses. Core approaches: Theory of comparative advantage Product cycle models Export growth models Learning by doing models Technology catch-up models The book discusses these in general terms. The following slides add some aspects/ideas for teaching.

5. International knowledge and technology flows • The book argues that ‘knowledge and technology’ flows are the most important aspect influencing growth • One can introduce/discuss the ideas of technology flows, or technological catch-up, in many ways: - Historical approaches (e.g. discuss US’s catch-up, China’s falling behind from 15th to 19th century and its subsequent catching up). • Focus on specific countries and/or discuss empirical evidence - Theoretical models (Box 9.1 – next 5 slides) - Consider firm-level perspective (Box 9.2)

6. Poorer countries : technological catch-up models • Assume growth rate of technology (Ai) in a poorer country depends on technology gap with leading country (e.g. (Ausa –Ai)/Ai). • Further, assume that the ability to learn, absorb and implement overseas technology is a critical factor. Call this absorptive capability, f . • This ‘model’ implies growth of follower country is ‘pulled up’ to level of leader country (convergence in growth rates of technology)

7. Implications of technological catch-up models • Assume growth in A drives growth in GDP per capita • Note this is result in steady state in Solow model, and also major implication from many endogenous growth models • Then technological catch-up model implies • poorer countries grow faster initially • but converge to growth rates of leader • poorer countries have lower level of technology (and GDP p.c in ‘steady state’) • higher absorptive capability (f)  faster short run growth & higher long run level

8. Graphical illustration Assuming f>0, poorest countries grow fastest. Converge in growth rates to g (lead country growth rate). Do not converge in levels. Note this model could apply to recent China/India growth, but implies decline in their growth rates in future.

9. Catching-up and falling behind • Above model predicts all poor countries catch-up but many show very low growth rates (Africa) • To avoid this, can assume some countries have f =0, or that very poor countries find lead country technology inappropriate (i.e. can’t learn from it) • Either will modify the model to allow countries to ‘fall behind’ – and be closer to empirical realities • More formal endogenous growth models also include ‘catch-up’ idea. They model as: • Firms in poorer countries invest in imitating products or technologies in lead countries. • Costs and benefits of imitation drive growth (as in R&D models). Can have conditions where growth does not occur.

10. What determines absorptive capability? • Appropriate ‘institutions’ • Accessibility to overseas technology • involves business, educational, trade, FDI links with other countries • Influenced by geography and transport • Ability to learn • includes broad human capital, but also specialist language and technical skills • Schooling, higher education, training, management • Incentives to implement new technologies • combination of institutional and macroeconomic factors that allow firms to invest • Stable inflation, interest rates. Taxation system. Property rights.

11. International financial flows • Long-term foreign direct investment flows • Short-term capital flows (shares, bonds, etc) Foreign direct investment (FDI): • FDI should directly raise domestic productivity (i.e. GDP p.w.), and some of this retained in domestic economy (suggests  rate of economic growth) • FDI may transfer skills or knowledge to domestic firms (suggests  growth) • FDI may increase competition for domestic firms ( or ↓ economic growth)

12. Short term financial flows Controversy over role of short term flows • Positive effects: ease capital market constraints and raise competition in financial markets • Negative effects: focus on short run, introduce instability (via asset prices and exchange rates) • Stiglitz (2000): capital market liberalization needs to be done slowly and with care. Asian crisis reduced growth rates. China and India less affected, both had capital controls. • Credit crunch and collapse of confidence in global banking supports Stiglitz

13. Private capital flows into emerging markets and developing countries

14. Trade openness and growth By way of summary, there are four key mechanisms at work in models of trade and growth • Trade increases potential market size (via exports) • Increasing market size  more profits and, possibly, ‘scale effects’ ( growth) • Trade increases domestic competition (via imports) • Increasing competition  less profits (↓ growth) … although there may be an incentive effect ( growth) • Trade and factor price equalisation (FPE) • FPE, if it holds,  marginal product of capital equal across countries (diminishing returns reflect world averages, growth rates convergence) • Dynamic comparative advantage (DCA) - see next slide

15. Growth and trade continued • Dynamic comparative advantage (DCA) • Assume countries have multiple sectors (e.g. low tech and high tech) • International trade creates specialisation (static theory of comparative advantage), which means some countries increase size of high (low) tech sectors • This affects growth if inherent differences in sectoral growth rates, or scale effects, vary between sectors. • DCA  countries’ growth rates may diverge (e.g. richer countries (+ a few) may grow faster)

16. International aspectsof intellectual property rights • Historically each country choose IPRs • This gives incentive to ‘free ride’ on others inventions • Solution was introduction of “national treatment” (i.e. give foreigners same rights as domestic inventors) in 19th Century by various international agreements • However, “national treatment” on its own leads to sub-optimal length of protection (since we assume countries ignore welfare in other countries). • Solution is introduction of TRIPs, but this also means poorer countries have to pay more • See fuller discussion in later lecture (Chapter 12)

17. Questions for discussion • What theories of trade are best able to explain the rapid rise in world trade to GDP ratio since 1950? • Do exports cause economic growth? • Which model is best for understanding technological catch-up by poorer countries? • “International financial flows can only hinder economic growth.” Discuss. • What conceptual factors are involved in international IPR agreements? • Under what circumstances might the TRIPS agreement damage welfare in poorer countries?

18. References Dean, M. and M. Sabastia-Barriel (2004), 'Why has world trade grown faster than world output?', Bank of England Quarterly Bulletin, 3(Autumn), 310-20. Maddison, A. (2001), The World Economy: A Millennial Perspective, OECD. Rogers, M. (2003), Knowledge, Technological Catch-up and Economic Growth, Cheltenham, Edward Elgar. Vernon, R. (1966), 'The product cycle hypothesis in a new international environment', Quarterly Journal of Economics, 80, 255-67. Watal, J. (1998), 'The TRIPS agreement and developing countries - strong, weak or balanced protection?', Journal of World Intellectual Property, 1, 281-307. Young, A. (1991), 'Learning by doing and the dynamic effects of international trade', Quarterly Journal of Economics, 106, 369-405.